How Come Almost Everyone is Cheating on Their Sales Tax?

Pretty much everybody is cheating on their taxes. That may sound like an overly generalized statement but statistics appear to support the claim. Utah Governor Gary Herbert recently said that 98 percent of people are cheating on their taxes robbing states of over $180 million in revenue.

But it’s not like you’re trying to cheat. You may be cheating unknowingly.

The Tax You're Not Paying

Here's the thing: Most states require its citizens to pay a use tax. Huh? Let’s say that you, as a citizen of the great state of Florida, purchased a new TV online but the ecommerce seller didn’t have nexus in Florida and so didn't charge you sales tax. In fact, the reason you purchased online was because you effectively received a discount on the price because tax wasn’t charged.

In Florida, like most states, you’re still on the hook for those sales taxes. It’s called a use tax. According to Florida law, at the end of every quarter, you have to pay 6 percent worth of use tax on that TV.

Sometimes people know about the tax and quietly overlook the obligation. One tax preparer commented, “In my over ten years of preparing returns professionally, I've only had one individual want to pay it.”

But often people just don’t know. Use tax doesn’t get the same PR treatment as its better-known brothers, sales tax and income tax. You can’t covertly not pay sales tax in most cases, and while you can stretch the truth a bit on income taxes, evasion will ultimately land you in jail. That’s not the case with use tax.

Do Businesses Need to Pay Too?

Business owners are under the same rules and have to pay use tax as well. In Pennsylvania, for example, when a business escapes paying sales tax on a purchase made out of state or online, the business owner is on the hook for a 6 percent use tax plus local taxes, which could be as much as 2 percent if they live in Philadelphia.

Pennsylvania’s Department of Revenue makes the point that businesses evading use taxes risk losing even more than they're on the hook for. The message is blunt on their website: “Many businesses believe they save money by making 'tax-free' purchases from out-of-state vendors, unaware that these transactions are often assessed upon audit by the department. Since assessments include interest and penalty on top of tax, in these cases businesses actually increase operational costs by not voluntarily addressing use tax obligations.”

While for individuals, it’s pretty straightforward (if you didn’t pay sales tax, you have to pay use tax), for companies, the waters are muddy. It has to do with how you “consume” items. If you transferred inventory or bought office furniture, you probably owe the tax. If you purchased manufacturing equipment used to produce something for resale, you’re probably exempt.

Use tax is one of the more common business audit triggers -- not that owners are necessarily trying to avoid the tax, but because they don’t understand the complicated nature of their obligations, they wind up in front of an auditor.

How Can Businesses Comply?

Unlike sales tax that requires you to know the tax laws of other states and localities within those states, use tax is based on your location. Plus, there are automated solutions that help small business owners wade through the complicated nature of sales and use tax. Small business owners will likely find it to be a better use of their time if they automate sales and use tax compliance procedures.

Use tax isn’t a federal tax, and rules vary by state. Some states don’t have a use tax while others have differing rates and rules largely dependent on their state sales tax laws. Find information on your state’s Department of Revenue website.